According to the New York Times today, the mortgage crisis is growing deeper. In plain language, that means that because of escalating mortgage payments, second mortgage payments, or job loss, more and more homeowners cannot keep their mortgage payments current. Moreover, with home values declining significantly, many homeowners have seen their equity vanish and become negative.

When a home is sold under foreclosure, the lender usually winds up buying it for the mortgage balance. If the value of the home exceeds the debt, the lender can sell it at a profit, but when the housing market is down, the lender must sell at a loss, that is, if it can find a buyer. As every JP reader knows, investors in mortgages and securities based on mortgages have seen their investments lose much of their value in the last six months. Since most of these investors are either very wealthy individuals or institutions with political clout, Congress is struggling to find ways to keep them solvent.

There is also some talk of helping homeowners threatened by foreclosure.

This crisis was predictable long ago. So was the Savings & Loan Crisis, the Dot Com Crisis, the stock market collapse, and the Asian meltdown. The problem each time was that no one who was able was willing to put a damper on what anyone with a grain of sense could see was a bubble — Congress, the Federal Reserve, the Treasury Department, the SEC, or even the mainstream media. Mainstream economists are just now noticing the problem, it appears. Dean Baker, of the Center for Economic and Policy Research, goes beyond sarcasm in criticizing an article in the Washington Post:

The [Washington] Post bizarrely describes a scenario in which Greenspan "puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that the subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier."

If this is true, then it implies an incredible level of incompetence on Greenspan's part. The rise in subprime lending was not some obscure fact known only to a privileged few. It was a widely noted development in the housing market over the years 2003-2005. If Greenspan was just made aware of this growth as in the last month of his tenure in January of 2006, then he was incredibly negligent in performing his job.

The growth in housing prices had been the central fuel of the U.S. economy in the recovery following the 2001 recession. Greenspan had been an eager proponent of housing dismissing the concerns of those who warned of a housing bubble. If he did not even know of the surge in subprime lending, then it is difficult to imagine any possible basis on which he could have ruled out the existence of a bubble in the housing market. (The article says that Greenspan "did not recall" whether he mentioned the growth in subprime lending to Bernanke. If Bernanke, did not already know about the growth in subprime, then he is not competent to be chairman of the Fed.)

In short, this article does more to conceal than reveal the developments that led to the current housing crash. There were no deep mysteries that had to be uncovered. House prices had gotten badly out of line with fundamentals by 2002. This was possible for any competent analyst to recognize just as it was possible to recognize the stock bubble by 1998. Unfortunately, the Post and the rest of the media relied almost exclusively on analysts who somehow failed to recognize the housing (and stock) bubbles or worse, had a direct interest in perpetuating these bubbles. Even after the fact, the Post is still choosing to rely almost exclusively on those who failed to see the bubble, rather than the experts who foresaw and warned of the problems ahead.

Dean Baker: The Post Misses the Housing Bubble Yet Again

We have seen all this before. Bubbles and busts have been part of the American experience since the time of Andrew Jackson. Economic systems structured around debt leverage are inherently unstable. A debt doesn't automatically change when the situation of the debtor changes; debt is inflexible, whereas income, equity, and value are at the mercy of the market. Debts are like shoals; inconsequential when the water is high, but deadly when just beneath the surface.

Now that the weaknesses of the mortgage industry are becoming apparent, I would invite readers with imagination to brainstorm in the comments a different system of providing housing to the vast majority of the public. Given the power of the financial sector, it is unlikely that radical restructuring of home financing would have a chance of becoming a reality any time soon, but, given an extended crisis, who knows how many minds might be open to something fundamentally different?

The problem, as conceived by the economists, the media, and government, is how to keep the present system going.

The question we ought to be asking is how we can house people as cheaply and comfortably as possible without pauperizing them, and at the same time giving them the maximum freedom to choose where to live and what to live in.

There has got to be a better way.

Since the '30s, government policy has had a profound effect upon what kind of homes were built, where they were built and how they were paid for. There is no reason why that policy cannot be altered for beneficial results.

For what it's worth, here's a proposal: The government lends you up to, say $150,000, on a house valued at no more than $175,000, interest-free, with equal monthly payments for 20 years. If you sell it at a profit, you have to put it into another house or the government gets to recoup the foregone interest out of the equity. After age 65 you get to keep the equity. You would still have to qualify for the loan, however, and a house whose price exceeds the $175,000 maximum (indexed for inflation) + any equity you might have accumulated in the sale of your previous house, would not qualify. If you want a MacMansion, you would still have to go to the bank and pay the interest on the entire amount financed.

Here's another idea: Finance mortgages the traditional way, but limit annual total payments to a fixed percentage of the homeowner's gross adjusted income for the year (with a reasonable floor to protect the lender), with any shortfall subtracted from interest and automatically forgiven. That way, the lender assumes some of the risk of declining wages and rising unemployment.

Neither of these suggestions may turn out to be practical or even possible, but I am offering them in an effort to stimulate some creative thought about our way of housing Americans.

It would be desirable, in my opinion, to eliminate debt completely from housing transactions, but I'm not sure that is possible. For many years, a home has been the nest egg for the middle class, subsidized by the mortgage interest deduction and capital gains tax break, and fed by the rising value of residential real estate. Now that many nest eggs are vanishing, it behooves us to examine the laying of nest eggs. A speculative nest egg is about as secure as Humpty-Dumpty, and just as likely as Humpty-Dumpty to be put back together again after it goes.

Of course, it is entirely possible that the bursting of the housing bubble and the "great fall of the offwall entailed at such short notice," is merely another phase of the great campaign to fleece the middle class of its remaining wealth, a campaign that has been effectively waged since Reagan became president.

Put your out-of-the-box ideas for housing in the comments.